Warren Buffett, the man who needs no introduction to my fellow investors. He is known for his investment philosophy and modest lifestyle till date. Presently, he is the Chairman and CEO of Berkshire Hathaway and has a net worth of around USD 85 billion (Rs. 6.10 lakh crore). Currently, Buffett stands at no. 4 on the richest people list. The exciting part that appeals to people is his ability to consistently beat the stock market for over 50 years, using what many people see as simple investment techniques.
Buffett made his first investment in a stock at an age of eleven (‘I was wasting my life up until then.’ when he was asked about his first investment). He bought his first stock at USD 38 a piece. He started to panic when the price declined to USD 27 soon after buying. He promptly sold his holdings when the price rebounded to USD 40. However, the stock then shot up to USD 200 soon after he sold them. This experience taught Buffett one of the fundamental lessons of investing: patience is a virtue.
Buffett at an age of 19, read both The Intelligent Investor by Benjamin Graham and Security Analysis by Benjamin Graham and David Dodd. These books, to date, are considered a Bible for investing community. He applied to Columbia Business School, due to the fact that both Benjamin Graham (father of value investing) as well as David Dodd were members of faculty there. Buffett was a successful student and this gave him an opportunity to directly work under Benjamin Graham’s partnership firm. He enjoyed working with him at the core. He later claimed that working with him gave him valuable experience of a lifetime.
Buffett Partnership Years
After his stint with Graham came to an end, Buffett started setting up investing partnerships and the most important one was Buffett Partnership Limited (BPL). As an obedient student and disciple of Graham, Buffett run partnerships focused on ‘Bargains’. These were companies that traded at a discount to the value of their net asset. This is also popularly known as ‘Cigar-Butt’ approach. In this approach, Buffett purchased large stake in bargains and waited for market sentiments to improve. Improvement in market sentiments would drive the share price up and the bargains could be sold for comfortable profit. Buffett also used his holding in these companies to try and speed up the process of extracting value. One-third of the BPL’s portfolio was also invested in what Buffett called ‘workouts’. These companies were in the process of being taken over by another company and giving him merger arbitrage.
Soon, the stock market started to become too expensive. Buffett’s probability of generating above average returns and cigar-butt style of investing was turning increasingly difficult. So, he decided to wind up BPL.
During his partnership years, Buffett would write a letter to his partners every year. These letters would convey his investment rationale, philosophy along with partnerships performance. These letters (Buffett Partnership Letters) are available in public domain and are a must read for investors.
Berkshire Hathaway Years
Buffett started focusing on Berkshire Hathaway, a textile manufacturing company. He originally bought it as a value investment (bargain) in 1964. He then realised that the company was getting stiff competition from domestic as well as foreign plants and did not have any future. So, Buffett turned Berkshire Hathaway into a holding company for his investments which he operates as a hedge fund.
Expensiveness in stocks made Buffett to shift his philosophy from idea of bargains to stocks that were merely cheap and had wonderful business prospects. Understanding the changes in economy, he currently has adopted a philosophy which believes that ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’. Buffett’s strategy on investing in wonderful business at fair price is built on staying away from anything that seems complicated. He says that it is most important to know one’s circle of competence and to stick with it. He added that the size of that circle of competence is not very important, however knowing the boundaries is vital. Understanding and sticking to his own circle of competence favored him to stay away from technology stocks during the maniac technology boom popularly known as the ‘dot-com bubble’ from 1995-2001. He focuses only on companies which are easy-to-understand businesses for him like insurance (GEICO). GEICO generates large amount of consistent cash flow that he reinvests in Berkshire Hathaway.
Even though we see that Buffett revised his investment philosophies a couple of times. But he, never inched a bit from the philosophy taught by Benjamin Graham: ‘Price is what you pay, Value is what you get’.
Warren Buffett has placed a great deal of importance on investing in companies having ‘moat’. These are companies with an advantage, legal or operational which prevent competitors from entering and affecting margins of business. He has developed an expertise for looking at businesses as a whole and chooses companies solely based on their overall potential. He is seen holding companies for a long-term and seeks ownership in quality companies only. These companies are capable of consistently generating free cash flows. When Buffett invests in a company, he is hardly concerned with whether the market will recognize its worth. His only concern is how well the company can make money as a business. Buffet also concentrates on buying companies outright as buying these companies outright allows him to keep his portfolio relatively concentrated. He is known for his early investments in companies like See’s Candies, GEICO, Coca-Cola, American Express etc. which was based on his circle of competence.
He continues his legacy of writing at Berkshire Hathaway too. He writes to his shareholders every year as Shareholder Letters. These letters are full of wisdom (that nearly anyone can understand) on various topics such as investing, money, life and much much much more. These letters occupy a very special place in business and finance.
What should I learn? There is an ocean of wisdom with this billionaire investor. Few things that I would love my reader to inculcate in their investment philosophy are to start investing (very) early, (always) invest in wonderful businesses with economic moat,and invest keeping long term horizon in mind (without fail). This would help investor’s start their wealth compounding journey in the right direction.
And lastly, for Warren Buffet fans/ disciples, CNBC.com has created ‘The Warren Buffett Archive’ which is the world’s largest collection of Buffett speaking about investing, money, business and life.
I am sure you’ll love it.
That’s all for now.
Until next time.